Global stocks drop as shutdown looms; Treasuries erase gains

Global stocks fell, trimming the biggest quarterly gain since the start of 2012, before a potential U.S. government shutdown. Treasuries and the yen reversed early gains while crude oil traded near its lowest level in three months.

The MSCI All Country World Index lost 0.8% as of 3:14 p.m. in New York as the Standard & Poor’s 500 Index slipped 0.6% to 1,681.94, trimming an earlier 1% drop. The yield on 10-year U.S. Treasury notes was down one basis point at 2.62% after losing four basis points earlier. The yen fell against 10 of 16 major peers after rising versus all of them earlier. West Texas Intermediate oil fell as much as 1.8% before trimming its loss to 0.3%, still trading at the lowest on a closing basis since July 3.

The deadlocked U.S. Congress headed into the final hours before the first partial government shutdown in 17 years without any signs of averting widespread furloughs of government workers. Italy’s government is on the verge of collapse after allies of former leader Silvio Berlusconi said they would quit the cabinet. China’s manufacturing rose less than economists estimated in September.

“We are at the mercy of whatever develops in Washington,” Michael James, a Los Angeles-based managing director of equity trading at Wedbush Securities Inc., said in an interview. “An attempt to prevent a shutdown is not totally unexpected, but some agreement will be better than none.”

Debt Ceiling

Republicans and Democrats remained at odds over whether to tie any changes to the 2010 Affordable Care Act to a short-term extension of government funding. The Senate voted 54-46 to reject the House’s latest plan, in a party-line move that puts the pressure back on House Republicans, who began meeting at 2 p.m. in the Capitol basement.

House Republicans are planning another volley that would include a delay of the individual mandate to purchase health insurance and eliminate government contributions to lawmakers’ health coverage, said a Republican leadership aide speaking on the condition of anonymity.

Even if the budget fight is resolved, lawmakers would immediately move to the next fiscal dispute over raising the $16.7 trillion debt ceiling.

“Risk appetite is on the retreat, driven by the political drama on both sides of the Atlantic,” Witold Bahrke, who helps oversee $55 billion as a senior strategist at PFA Pension A/S in Copenhagen, wrote in an e-mail. “Dysfunctional governments are the root of the problem, which means heightened political uncertainty will be the dominating theme, reversing the equity- friendly sentiment from the first half of September.”